Factor in TDS on equity dividends while calculating tax liability

From the current financial year, tax deducted at source (TDS) will be cut at 7.5% on equity dividends exceeding ₹5,000 for resident Indians. Companies have begun sending out emails to shareholders notifying them of this provision and asking them to provide appropriate documents if they are exempt from paying TDS.

Earlier, dividend distribution tax (DDT) was levied on dividends from shares at 15%. After surcharge and cess, the effective rate went up further. In the financial year 2019-20, it came to 20.35%. However, Budget 2019 abolished DDT and made dividends taxable in the hands of shareholders. It also imposed a TDS on dividends above ₹5,000 at 7.5%. The change is also applicable to dividends on mutual funds which were also earlier subject to DDT.

If your income is less than the basic exemption threshold of ₹2.5 lakh per year, you can submit Form 15G or Form 15H (if you are above 60 years of age) to the company to prevent TDS from being deducted. If you are a non-resident Indian (NRI), TDS on dividends will be levied at 20%. However, Double Taxation Avoidance Agreements (DTAAs) with some countries provide for lower TDS. To claim this benefit, you will have to obtain a tax residency certificate (TRC) from your home country and submit it in India.

If your dividend amount is less than ₹5,000, TDS will not be deducted on the same. However, you’ll need to add this income to your total income and pay the applicable tax yourself. Dividend income is taxed at slab rate. For instance, if your taxable income in a year exceeds ₹10 lakh and you get a dividend of ₹3,000, you will have to pay tax at 30% ( ₹900) along with applicable surcharge and cess.

The MF Advantage

Some experts have asked investors to consider switching their direct stock portfolios to mutual funds. Equity mutual funds invest in stocks and are, hence, an indirect way of holding stocks. Mutual funds are exempt from tax on dividends and the dividend gets added to the net asset value (NAV), which benefits the end investor.

MF investors only have to pay capital gains tax when they redeem the units. This is levied at 15% for holding periods of less than one year and 10% for longer holding periods. Gains up to ₹1 lakh per year are exempt. “Investors typically build these stock portfolios haphazardly, based on something they’ve read or heard from a friend. A professionally managed mutual fund can do a far better job than such portfolios. The dividend advantage of mutual funds is yet another reason why you should be investing through them. If you don’t like paying high expense ratios for mutual funds, opt for direct plans,” said Suresh Sadagopan, founder, Ladder 7 Financial Advisories, a Sebi-registered investment adviser.

However, dividends from mutual funds are also taxable at slab rate and hence only investors in growth plans of mutual funds are fully able to capture the tax advantage mentioned above.

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